A Guide to Compensation Analytics

Compensation analytics is the process of analyzing your organization’s compensation data. It requires using key metrics sourced from internal and external data. The goal is to see whether your compensation practices are fair and competitive.

There are a lot of different metrics a company can use. In this article, we’ll discuss 18 key metrics worth understanding. But first, you need to recognize why compensation analytics are important.

Benefits of Compensation Analytics

A holistic workforce is much more likely to attract and retain top talent. Compensation analytics provide a lot of benefits when it comes to ensuring a fair, equitable, and competitive organization.

• Fair and equitable compensation – Compensation analytics can help an organization identify bias or unfair practices in their compensation packages.
• Informed decision-making – Compensation analytics provide the data and insights needed to make informed decisions about compensation strategies.
• Pay equity – Compensation analytics will expose pay gaps between employees, helping an organization achieve pay equity.
• Protecting the company’s bottom line – Compensation analytics can identify labor costs that go beyond the allocated budget to improve financial choices.
• Retaining talent – Compensation analytics can help an organization make better decisions for its employees. Making them feel important and valued will improve retention rates.

18 Key Compensation Analytics

1. Base Salary

Base salary is the fixed amount of money that an employee receives for performing their job. Companies calculate this value from industry standards, the company’s pay scale, and skills and experience. It acts as the foundation for other compensation decisions.

2. Total Cash Compensation

Total cash compensation includes the base salary and additional rewards, including bonuses, commission, and profit sharing. This is an important calculation as it offers a better understanding of the different elements of an employee’s compensation.

3. Short-Term Incentives

Short-term incentives are typically annual performance-based rewards. The goal is to encourage employees to achieve specific goals within a short period. Employers have flexibility in what these rewards are, meaning they can be cost-effective.

4. Long-Term Incentives

Long-term incentives are another motivator. Employees will achieve these goals over a longer period, encouraging longer retention. These incentives are commonly stock options, cash bonuses, and retirement plans.

5. Benefits Value

Benefits value is the monetary value of any benefits an employee receives. This includes health insurance, reimbursements, travel cards, and memberships. This value will mean more to companies choosing to use benefits as a significant portion of total compensation.

6. Total Direct Compensation

Total direct compensation includes base salary, short and long-term incentives, and benefits value. You can calculate this using payroll and benefits data. This is a comprehensive measure of an employee’s compensation, giving them a good idea of their role’s worth.

7. Compensation Ratio

Compensation ratio is the ratio of an employee’s actual pay against salary range midpoints for the same or similar positions in the market. This helps to make comparisons across employees in different ranges and understand where they are regarding the midpoint.

8. Pay Equity

Pay equity is the measurement of pay distribution fairness. Equal work deserves equal pay, referring to work that has equal value to an organization. It involves comparing the pay of employees in similar roles or with similar experience and skills.

9. Market Ratio

Market ratio is the ratio of someone’s pay to the market average for their role. This helps to identify whether an employee is under or overpaid and to evaluate how competitive the compensation is in the industry.

10. Turnover Rate

Turnover rate is the percentage of employees leaving the company over a set time. For financial and reputation reasons, organizations should strive for longer retention and lower turnover rates.

11. Cost of Living Adjustment

Compensation often requires revising for cost-of-living adjustments. Inflation means living expenses are increasing, and organizations must be mindful of that. This will require ongoing research and reviewing.

12. Merit Increase

Merit increase is based on employee performance. Hard-working employees that are constantly applying themselves and going beyond expectations need rewards. These incentives remind them how valued they are.

13. Promotion Increase

A promotion increase is an increase in pay due to a role promotion. When an employee makes professional developments, they’re usually handling more responsibilities and require financial incentives.

14. Payroll Budget

Payroll budget is the overall budget for employee compensation. The finance and HR teams are responsible for adhering to these budgets for the sake of financial planning and cost control.

15. Overtime Pay

Overtime pay is additional compensation for hours worked beyond the standard expectations. Often there are legal obligations to do so, but it’s also important to compensate employees for going above and beyond.

16. Bonus Pay

Bonus pay is an additional reward for excellent performance. You may offer this as an incentive for employees to reach certain targets and award them when they achieve the goal. It can also be a spontaneous decision for a standout employee.

17. Profit Sharing

Profit sharing is a bonus paid out to employees based on company profits. This can motivate employees to align themselves with business objectives and increase the company’s profitability. They have a direct financial stake in the organization’s success.

18. Stock Options

Stock options give employees the right to buy company stocks at a fixed price. This can help align employee interests with those of the company, further motivating their performance. These can be either short or long-term incentives.